Fed officials see high hurdle for changing course on QE taper

WASHINGTON/NEW YORK/LONDON (Reuters) - The U.S. economic outlook would have to change dramatically for the Federal Reserve to alter the pace at which it is winding down its massive bond-buying program, three top U.S. central bankers said on Thursday.

The sun rises to the east of the U.S. Federal Reserve building in Washington, July 31, 2013. REUTERS/Jonathan Ernst

And one, Atlanta Fed President Dennis Lockhart, told Reuters in an interview that even a third month of below-par U.S. jobs growth would not be enough to warrant such a move.

While Fed Chair Janet Yellen has stressed that her planned wind-down of the stimulus program is not on a preset course, the comments Thursday from Fed officials spanning the policy spectrum make it clear that the hurdle for any change is high.

Weak economic data, even if it persists for a few more months, does not meet that test, all three said.

“In my mind, unless we really fall off track in the economy pretty dramatically, I think the tapering program should proceed,” Lockhart told Reuters.

He added that the recent softness in economic data was likely due to unusually severe winter weather and cautioned that it could be April or May before the Fed has a clear read on the underlying strength of the economy in the first quarter.

“There could be conditions in which a pause or even a renewal of purchases would be necessary, but I think the bar is very high,” said Lockhart, considered a policy centrist at the Fed.

New York Fed President William Dudley, who leans toward the dovish end of the policy spectrum, agreed.

The threshold for changing course on stimulus withdrawal is “pretty high,” he said during an event hosted by The Wall Street Journal. “The outlook would have to change in a material way relative to my expectation.”

At an event in London the hawkish head of the Philadelphia Fed, Charles Plosser, said: “We are on this path now and we are not going to deviate from that path unless something pretty significant happens.”

The Fed this year started winding down five years’ worth of unprecedented accommodative policies meant to fight the 2007-09 recession and foster a stronger recovery.

That means the central bank will eventually stop buying trillions of dollars worth of bonds and holding overnight interest rates at zero.

Dudley acknowledged that recent fierce winter weather in parts of the nation had depressed activity in early 2014, but said those effects will be both hard to gauge and transitory.

“The weather is going to make reading the data over the near term a little more difficult,” he said.

Plosser, who like Dudley votes this year on the Fed’s policy-setting panel, predicted it would take two more months before the Fed can get a clear reading on economic data.

That suggests that even if Friday’s closely watched jobs report falls short of expectations, Yellen would likely press ahead with reductions to the Fed’s bond-buying program, known as quantitative easing, or QE.

The Labor Department is expected to report on Friday that U.S. businesses added 149,000 jobs in February and the unemployment rate remained unchanged at 6.6 percent, according to a Reuters survey of economists.

HAWK-DOVE DIVIDE

Where the policymakers differed was in their views on how soon the Fed may need to raise rates.

Plosser cautioned that the Fed should leave the door open to speeding up the taper, or risk being behind the curve as the economy gains traction.

“If the economy continues to improve, we could find ourselves still trying to increase accommodation in an environment in which history suggests that policy should perhaps be moving in the opposite direction,” he said.

Dudley, whose forecast of 3 percent growth for the U.S. economy this year matches Plosser’s, suggested otherwise, saying that headwinds are likely to persist for some time.

“We have a long time to go before we actually have to think about raising short-term rates in my opinion,” said Dudley, whose views are extremely influential at the Fed policy-setting table.

Traders of short-term U.S. interest rate futures put the first rate hike at some time in late 2015, based on trading at CME Group Inc’s Chicago Board of Trade.

Both Lockhart and Dudley said those expectations are reasonable, given what is known about the economy today.

Last year, the Fed said it would not consider raising rates until the jobless rate fell to at least 6.5 percent, just a tenth of a percentage point from where it is now.

But policymakers have downplayed that threshold in recent months. Economists fear the falling unemployment rate partly reflects large numbers of workers leaving the labor force.

Lockhart, Dudley and Plosser all said the 6.5 percent threshold is providing little value and needs to be revisited.